Changing the Business Model: Effects of Venture Capital Firms and Outside CEOs on Portfolio Company Performance

• Author: Harry J. Sapienza,Violetta Gerasymenko,Dirk De Clercq
• Published date: 01 March 2015
• DOI: http://doi.org/10.1002/sej.1189
• Date: 01 March 2015

CHANGING THE BUSINESS MODEL: EFFECTS OF

VENTURE CAPITAL FIRMS AND OUTSIDE CEOs ON

PORTFOLIO COMPANY PERFORMANCE

VIOLETTA GERASYMENKO1*, DIRK DE CLERCQ2, and

HARRY J. SAPIENZA3

1College of Business, Oregon State University, Corvallis, Oregon, U.S.A.

2Goodman School of Business, Brock University, St. Catharines, Ontario, Canada

3Carlson School of Management, University of Minnesota, Minneapolis,

Minnesota, U.S.A.

This study extends extant research on business model change by examining the impact of

venture capital firms (VCFs) on the performance of young ventures that have substantially

changed their business model. The analysis, using a unique dataset of 163 venture capital-

backed portfolio companies (PFCs), reveals a positive relationship between the scope of VCF

involvement and PFC performance. Furthermore, the VCFs’ experience with business model

change and the recruitment of an outside CEO to the PFC both increase the positive impact of

VCF involvement. These findings have implications for theory and practice. Copyright © 2014

Strategic Management Society.

INTRODUCTION

Business models play an important role in firms’

ability to attain a sustainable competitive advantage

and better financial performance (Amit and Zott,

2012; Casadesus-Masanell and Ricart, 2010;

Osterwalder, Pigneur, and Tucci, 2005; Zott and

Amit, 2008). Given the increasing volatility and

dynamics of markets, the importance of successful

business model adaptation as a way to maintain a

competitive market position is a real-world chal-

lenge for entrepreneurial managers (Mendelson,

2000; Sosna, Trevinyo-Rodriguez, and Velamuri,

2010; Wirtz, Schilke, and Ullrich, 2010). While

scholarly interest in the business model has

increased dramatically since the work of Amit and

Zott (2001), understanding the challenges of effec-

tive business model change and implementation has

received relatively scant scholarly attention

(Chesbrough, 2010; Zott and Amit, 2008).

Despite their critical relevance to young ventures,

the challenges of effective business model change

have heretofore been studied primarily in the

context of large established organizations (Amit and

Zott, 2001; Bock et al., 2012). The implementation

of new business models in large organizations is

subject to the challenge of inertia (Tripsas and

Gavetti, 2000), which emerges from managers’

adherence to existing practices—practices informed

by cognitive constraints and political considerations

(Amit and Zott, 2012; Chesbrough, 2010; Huff,

Huff, and Thomas, 1992). Entrepreneurial ventures

oftentimes are forced to adapt their initial business

plan, because of mistaken assumptions in their

original business plan or significant changes in their

external environment (Davidsson and Honig, 2003;

Dimov, 2010), requiring a significant reconsidera-

tion of the business model that underlies this initial

Keywords: business model change; venture capital; CEO

recruitment; learning theory; resource dependence view

*Correspondence to: Violetta Gerasymenko, College of Busi-

ness, Oregon State University, 400 Bexel Hall, Corvallis, OR

97330, U.S.A. E-mail: Violetta.Gerasymenko@oregonstate.

edu

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Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 9: 79–98 (2015)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1189

Copyright © 2014 Strategic Management Society

business plan (Amit and Zott, 2001; Andries and

Debackere, 2007; Zott and Amit, 2007, 2008). As a

result, business models may undergo substantial

change during the early stages of a firm’s existence.

Yet, relatively less attention has been devoted to the

challenges that young firms encounter when modi-

fying their business models (Andries and

Debackere, 2007; Bhide, 2003; Parker, Storey, and

Witteloostuijn, 2010). We define ‘substantial’ busi-

ness model change as the concurrent adjustments of

multiple components of the business model, par-

ticularly in terms of the venture’s resources and

competences, its internal organization and its rela-

tion to external stakeholders, and the nature of its

value proposition (Demil and Lecocq, 2010). This

conceptualization allows for a dynamic rather than

static approach to what constitutes a business

model, in that it acknowledges that changes in the

business model tend to be complex and interwoven

with various aspects of the business simultaneously

(Demil and Lecocq, 2010).

We posit that young ventures may face various

resource-related challenges when implementing a

substantially new business model (Chesbrough,

2007). One such challenge is the exacerbation of the

liability of newness problem when both internal

members and external stakeholders have to be

‘reeducated’ about what constitutes the venture’s

business model (Nicholls-Nixon and Cooper, 2000;

Singh, Tucker, and House, 1986). In addition, the

challenge of inertia encountered by established firms

in changing business models may also feature in

young ventures. However, in newer firms, the inertia

may emanate from the founders’ strong emotional

attachment to the business model they initiated when

launching their venture (Cardon et al., 2009; Parker,

2006). The survival and success of young ventures is

nevertheless highly dependent on their ability to

develop and implement new business models despite

these considerable challenges (MacMillan and

Gunther McGrath, 2000; Zott and Amit, 2008).

Hence, the primary research question that drives this

research is why some young ventures are more suc-

cessful than others in substantially changing their

business models.

To answer this question, we consider the role

played by an important external stakeholder, venture

capital firms (hereafter, VCFs), in the successful

implementation of a new business model. Our base-

line premise is that VCF involvement will enhance

the performance of portfolio companies (hereafter,

PFCs) that have undergone substantial business

model changes, because VCFs can compensate for

the ventures’ lack of resources and credibility. In

addition, we postulate that the extent to which such

VCF involvement contributes to PFC performance

will depend on two critical contingencies, namely

VCFs’ domain-specific experience with business

model change and their recruitment of an outside

CEO into the PFCs. First, through their experience

with business model change in previous and ongoing

portfolio investments, VCFs can provide more rel-

evant and focused knowledge about the specific

problems that PFCs encounter when modifying their

business models (Gupta and Sapienza, 1992).

Second, the recruitment of an outside CEO may also

increase the positive impact of VCF involvement on

PFC performance. Outside CEOs are known to bring

a fresh perspective to the venture (Lant and Milliken,

1992), which should facilitate the successful transi-

tion from the old to the new business model. In

addition, when the VCF recruits a new CEO to the

venture, the CEO may experience a sense of loyalty

to the investor (De Clercq and Sapienza, 2006)

and reciprocate by channeling the value-adding

services that the VCF provides more vigorously into

the effective implementation of the new business

model.

To test these predictions, we collected data about

22 French VCFs (focused on early-stage financing)

and 163 PFCs (i.e., 163 PFCs that had undergone

substantial changes in their initial business

models). The data were collected from multiple

sources, including survey and interview data from

venture capitalists who serve on the board of their

PFCs, and secondary data from VCFs’ financial

reports and public sources. We captured detailed

information on the nature of VCF involvement in

terms of the provision of advice and network con-

tacts (the ‘scope’ of VCF involvement), their

existing knowledge base with respect to business

model change, the recruitment of an outside CEO,

and the evolution of the financial value of the

PFCs. These data are unique in that they encom-

pass the entire early-stage segment of the venture

capital industry in a country (France) that has

received relatively little attention in previous

venture capital literature.

We make several contributions to the literature

through this study. First, we extend previous

research on business model change by examining the

applicability of the research that has focused on

implementation challenges in established organiza-

tions to the realm of young ventures (Bhide, 2003;

80 V. Gerasymenko, D. De Clercq, and H. J. Sapienza

Copyright © 2014 Strategic Management Society Strat. Entrepreneurship J.,9: 79–98 (2015)

DOI: 10.1002/sej